The housing industry has been around for many years. It is an important industry and one that will always have a necessity to exist since it creates a product that is one of the essentials of human life, housing. Economics play an important role in the housing industry along with all other industries. There are several factors that can influence the housing industry economically. Supply and demand coupled with price elasticity can affect the housing industry. Negative and positive externalities, wage inequality, and the monetary and fiscal policies can all have substantial affect the industry of new homes. It must also be determined exactly how the economy affects the industry in both positive and negative ways. Price Elasticity
The price elasticity of supply and demand is defined as the measure of how much the quantity demanded of a good responds to a changing the price of that good and the measure of how much the quantity supplied of a good responds to a change in price of that good (Mankiw, 2004). There are several factors that must be examined while researching price elasticity of supply and demand in the housing industry. What affect does multiple-home owners have on the price elasticity? Are the prices associated with supply and demand elastic or inelastic for the housing industry? The demand of housing is extremely elastic while the supply is inelastic. When the prices are right, homeowners often buy second or even third homes. Demand for housing is an embodiment of a consumers’ decision of how much housing to actually consume. In the case of multiple-home owners, the consumer has decided that it is necessary to own multiple homes. This decision may be based on personal reasons, such as recreational uses, or on their wealth and income status (Belsky, 2006). The standard demand model in equation generates price and income elasticities of housing demand based on the utility of housing consumption relative to all other goods. This standard model acts as a guideline to economists to determine the overall price and income elasticities of the housing demand (Belsky, 2006). The main determinants of the demand for housing are demographic. However other factors like income, price of housing, cost and availability of credit, consumer preferences, investor preferences, price of substitutes and price of compliments all play a role (Fallis, 1999). As evident by this, the demand for housing has many various aspects and factors that must be considered while determining the price elasticity of demand for the housing industry. In the long0run, the price elasticity of supply for new homes is quite high. The estimated price elasticity is 8.2, but in the short scope, the price elasticity of new homes tends to be very price inelastic. This price elasticity is very dependant on the elasticity of substitutions available. There are actually significant substitutions available between land and materials, and labor and materials (Fallis, 1999) Negative and Positive Externalities
An externality is defined as the uncompensated impact of one person’s actions on the well being of a bystander (Mankiw, 2004). There are positive and negative externalities, which can have different effects on the economy as a whole.
There are many different impacts that the new housing industry can have on the economy. There are both positive and negative externalities associated with the building of new homes. One of the key points to consider is that the economy cannot grow without the population growing and the population cannot grow without new housing (Glaeser, 2006). Limits on construction can lead to an ultimate limit on the population. This limitation of the population can have a grave affect on the economy for that area. Without population, there is less money being spent in other areas to help boost the economy. What is the difference between a private good and a public good? Private goods are ones that are both excludable...
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